Carbon leakage list pursuant to the EU ETS Directive denotes the specific measure aimed to address the risk of carbon leakage, it determines sectors and subsectors exposed to that risk in the trading periods of the European Union Emissions Trading Scheme (EU ETS).

The carbon leakage list covers the sectors that get more free allocation than otherwise that would be the case.

The amount of free allowances affects companies' cash-flows because depending on carbon efficiency and emissions, it influences on the amount of allowances companies have to purchase.

Carbon leakage list in the third trading period of the EU ETS (2013 - 2020)

The legal base for determining the carbon leakage list in the third trading period of the EU ETS (2013 - 2020) was Article 10a(13) of the EU ETS Directive. The list was to be adopted by the European Commission after agreement by Member States and scrutiny by the European Parliament and Council through the so called ‘comitology procedure’.

The first carbon leakage list was adopted by the Commission Decision No 2010/2/EU of 24 December 2009 determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage (OJ L 1, 5.1.2010, p. 10 as amended). The list was modified in years 2011, 2012 and 2013.

The classifications used for the assessments made in the first list were NACE and PRODCOM codes of sectors, subsectors and products. NACE codes are 4-digit codes used to classify which specific sector an installation belongs to, based on the activities carried out.

The codes were taken from the Classification of Economic Activities in the European Community.

Pursuant to the above Guidance Document Version 1.1 of NACE should be used for the determination of the carbon leakage status.

Significance of the carbon leakage list

The issue of carbon leakage relates to the risk that companies in sectors subject to strong international competition might relocate from the EU to third countries with less stringent constraints on greenhouse gas emissions.

Those sectors which are deemed to be exposed to carbon leakage an included in the relevant list receive 100% of the benchmarked allowances for free (see table).

The benchmarks reflect the average performance of the 10% most efficient installations (in terms of their greenhouse gas emissions) in a sector or subsector in the EU) what creates additional incentives for ETS installations to reduce emissions and improve energy efficiency.

The PRODCOM code is an 8-digit code and stands for the PRODucts of the European COMmunity Inquiry.

It is a survey of manufactured products governed by an EU Regulation (3924/91).

The product definitions are standardised across the EU to give comparability between Member States’ data and the production of European aggregates at product level.

There is a direct relationship between the NACE and PRODCOM codes and the first 4 digits of the PRODCOM code match the 4 digits of the NACE v1.1 code.

According to Article 10a(15) and (16) of the EU ETS Directive, in the third trading period there are two criteria to be taken into account in the quantitative assessment of the sectors:

1) their carbon costs as share of gross value added, and

2) the trade intensity with third countries (defined as the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size for the EU (annual turnover from third countries)).

The EU ETS Directive stipulates that if the carbon costs are above 5% and the trade intensity is above 10%, or either of them is above 30%, the sector can be included in the carbon leakage list.

Carbon Leakage Exposure Factors

Year

2012

2014

2015

2016

2017

2018

2019

2020

Exposure factor for significant carbon leakage risk

1

1

1

1

1

1

1

1

Exposure factor for no significant carbon leakage risk

0.8000

0.7286

0.6571

0.5857

0.5143

0.4429

0.3714

0.3000

The carbon leakage exposure factor is applied at sub-installation level.

To calculate the amount of allowances for benchmarked products, the carbon leakage list is used - if the product is on the list (i.e. the NACE code or the PRODCOM code is on the list) the factor to use is 1, if not, the declining factor given in table above is to be used.

In line with the above-mentioned Guidance Document, for carbon leakage factors applied to fall-back approaches (i.e. where the sub-installation at issue is not the product-benchmark sub-installation) the carbon leakage exposure factor to use depends on whether or not the heat, fuel or process emissions are associated with a process to manufacture a product included in the carbon leakage list.

In the case that a sub-installation exports heat to an EU ETS plant, the carbon leakage status of the heat-importing ETS plant is applied. This can be derived from the carbon leakage list depending on the product(s) that the importing plant manufactures. There is the needs to define the carbon leakage status of the installation receiving the heat because allowances are given to heat consumers, unless the importing installation is not in the ETS in which case the allowances are given to the producer of the heat.

If a sub-installation exports heat to a non-ETS plant, the carbon leakage status of the importing installation is assumed to be not at risk by default, unless the “at risk” status of the importing installation not in the ETS can be proven and the relevant documentation is included in the data collection report.

Carbon leakage list amendments and the second carbon leakage list for the period from 1 January 2015 to 31 December 2019

Carbon leakage lists were to be established by 31 December 2009 and every five years thereafter. The first list was adopted in 2009 and applied for the years 2013-2014. The second has been adopted during 2014 with the term of the validity from 2015 to 2019.

The above notwithstanding, the possibility of adding sectors or subsectors each year is foreseen in Article 10(a) paragraph 13 of the EU ETS Directive if it can be demonstrated, in an analytical report, that this sector or subsector satisfies the criterioil aid down in the Directive, following a change that has substantial impact on the sector's or subsector's activities.

The EU Climate Change Committee in July 2013 approved the addition of two other sectors and four sub-sectors to the current list (for the period 2009-2014).

The two sectors were plaster and plasterboard, both of which belong to the gypsum industry.

The four sub-sectors were open-die forging, solid whey and two sub-sectors related to processed potato products.today of sectors deemed exposed to significant risk of carbon leakage.

On 5 May 2014 the European Commission sent its draft proposal for a 2015-2019 carbon leakage list to the EU Climate Change Committee.

Since there were no objections raised by either the European Parliament or the Council during the three-month scrutiny period, and the Climate Change Committee (in which all Member States are represented) issued positive opinion, the new framework was finalised on 27 October 2014 (Commission Decision 2014/746/EU of 27 October 2014 determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage, for the period 2015 to 2019 (2014/746/EU).

As the European Commission reported in the relevant communication of 27 October 2014, this second carbon leakage list "provides regulatory predictability for industry for the period from 1 January 2015 to 31 December 2019 and succeeds the first carbon leakage list that was still valid until 31 December 2014.

According to the ETS Directive, it will be possible to add further sectors to the list if they comply with the criteria stated in the Directive, but it will not be possible to remove sectors from the list until its expiration".

Equivalent measures in other cap-and-trade schemes

Information on the California equivalent for the European carbon leakage list is available under the following link.

The final key determinations in this regard have been made by the Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814, which amended the EU ETS Article 10b (see the text below).

On 15 February 2019 the European Commission adopted a Delegated Decision 2019/708 on the carbon leakage list for the period 2021 to 2030 (EU ETS phase 4).

The new carbon leakage list:

- covers the entire 10-year period of phase 4 of the EU ETS (i.e. years 2021 - 2030),

- identifies 63 sectors and sub-sectors (amounting to about 94% of industrial emissions and 98% of industrial emissions covered by the carbon leakage list for the period 2015-2020).

As the consequence of the inclusion of a given sector or subsector in the carbon leakage list, each installation in that (sub)sector is granted free allocation at 100 % of its relevant benchmark level.

In turn, (sub)sectors not on the carbon leakage list will receive 30 %, up to 2026, with the free allocation to be gradually phased out by 2030.

The eligible sectors and subsectors were assessed on the basis of the criteria set out in Article 10b(1), Article 10b(2), Article 10b(3), first subparagraph and Article 10b(3), fifth subparagraph of the EU ETS Directive.

The carbon lekage list is the result of a new assessment criterion that combines emission intensity and trade intensity, which must be above 0.2 threshold,

The detailed assumptions and the methodology adopted in this regard by the European Commission is explained in Recitals 4 - 10 of the European Commission Delegated Decision of 15 February 2019 on the carbon leakage list for the period 2021 to 2030 (EU ETS phase 4) - see below.

EU ETS Directive as amended by the Directive (EU) 2018/410

Article 10b

Transitional measures to support certain energy intensive industries in the event of carbon leakage

1. Sectors and subsectors in relation to which the product resulting from multiplying their intensity of trade with third countries, defined as the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size for the European Economic Area (annual turnover plus total imports from third countries), by their emission intensity, measured in kgCO2, divided by their gross value added (in euros), exceeds 0,2, shall be deemed to be at risk of carbon leakage. Such sectors and subsectors shall be allocated allowances free of charge for the period until 2030 at 100 % of the quantity determined pursuant to Article 10a.

2. Sectors and subsectors in relation to which the product resulting from multiplying their intensity of trade with third countries by their emission intensity exceeds 0,15 may be included in the group referred to in paragraph 1, using data for the years from 2014 to 2016, on the basis of a qualitative assessment and of the following criteria:

(a) the extent to which it is possible for individual installations in the sector or subsector concerned to reduce emission levels or electricity consumption;(b) current and projected market characteristics, including, where relevant, any common reference price;(c) profit margins as a potential indicator of long-run investment or relocation decisions, taking into account changes in costs of production relating to emission reductions.

3. Sectors and subsectors that do not exceed the threshold referred to in paragraph 1, but have an emission intensity measured in kgCO2, divided by their gross value added (in euros), which exceeds 1,5, shall also be assessed at a 4-digit level (NACE-4 code). The Commission shall make the results of that assessment public.

Within three months of the publication referred to in the first subparagraph, the sectors and subsectors referred to in that subparagraph may apply to the Commission for either a qualitative assessment of their carbon leakage exposure at a 4-digit level (NACE-4 code) or an assessment on the basis of the classification of goods used for statistics on industrial production in the Union at an 8-digit level (Prodcom). To that end, sectors and subsectors shall submit duly substantiated, complete and independently verified data to enable the Commission to carry out the assessment together with the application.

Where a sector or subsector chooses to be assessed at a 4-digit level (NACE-4 code), it may be included in the group referred to in paragraph 1 on the basis of the criteria referred to in points (a), (b) and (c) of paragraph 2. Where a sector or subsector chooses to be assessed at an 8-digit level (Prodcom), it shall be included in the group referred to in paragraph 1 provided that, at that level, the threshold of 0,2 referred to in paragraph 1 is exceeded.

Sectors and subsectors for which free allocation is calculated on the basis of the benchmark values referred to in the fourth subparagraph of Article 10a(2) may also request to be assessed in accordance with the third subparagraph of this paragraph.

By way of derogation from paragraphs 1 and 2, a Member State may request, by 30 June 2018, that a sector or subsector listed in the Annex to Commission Decision 2014/746/EU (*6) in respect of classifications at a 6-digit or an 8-digit level (Prodcom) be considered to be included in the group referred to in paragraph 1. Any such request shall only be considered where the requesting Member State establishes that the application of that derogation is justified on the basis of duly substantiated, complete, verified and audited data for the five most recent years provided by the sector or subsector concerned, and includes all relevant information with its request. On the basis of those data, the sector or subsector concerned shall be included in respect of those classifications where, within a heterogeneous 4-digit level (NACE-4 code), it is shown that it has a substantially higher trade and emission intensity at a 6-digit or an 8-digit level (Prodcom), exceeding the threshold set out in paragraph 1.

4. Other sectors and subsectors are considered to be able to pass on more of the costs of allowances in product prices, and shall be allocated allowances free of charge at 30 % of the quantity determined pursuant to Article 10a. Unless otherwise decided in the review pursuant to Article 30, free allocations to other sectors and subsectors, except district heating, shall decrease by equal amounts after 2026 so as to reach a level of no free allocation in 2030.

5. The Commission is empowered to adopt, by 31 December 2019, delegated acts in accordance with Article 23 to supplement this Directive concerning the determination of sectors and subsectors deemed at risk of carbon leakage, as referred to in paragraphs 1, 2 and 3 of this Article, for activities at a 4-digit level (NACE-4 code) as far as paragraph 1 of this Article is concerned, based on data for the three most recent calendar years available.

Explanatory Memorandum to the European Commission Delegated Decision of 15 February 2019 on the carbon leakage list for the period 2021 to 2030 (EU ETS phase 4)

The list of sectors and subsectors which are deemed to be at risk of carbon leakage (hereinafter referred to as the 'carbon leakage list') will be valid for the entire Phase 4 of the EU ETS trading period, i.e. 2021-2030.

This will provide industry with the high level of system security and certainty relevant to make long-term investments.

When a sector or subsector is placed on the carbon leakage list, each installation in that (sub)sector is granted free allocation at 100 % of its relevant benchmark level.

Those not on the list will receive 30 %, up to 2026, with the free allocation to be gradually phased out by 2030.

...

The carbon leakage assessment was carried out in two steps.

For the quantitative first-level assessment at NACE-4 level of the statistical classification of economic activities, a sector is deemed to be at risk of carbon leakage if the ‘carbon leakage indicator’ exceeds the 0.2 threshold set in Article 10b(1) of the ETS Directive.

For a limited number of cases with clearly established eligibility criteria specified in paragraphs 2 and 3 of Article 10b of the ETS Directive, a ‘second-level assessment’ was carried out.

This took the form of a qualitative assessment with specified criteria or a quantitative assessment at a disaggregated level.

Recitals 4 - 10 of the European Commission Delegated Decision of 15 February 2019 on the carbon leakage list for the period 2021 to 2030 (EU ETS phase 4)

(4) By its Decision 2014/746/EU, the Commission determined a carbon leakage list for the period 2015 to 2019. By Directive (EU) 2018/410 of the European Parliament and the Council, the validity of the carbon leakage list was extended until 31 December 2020.

(5) Article 10b of Directive 2003/87/EC sets out the criteria for the assessment based on data from the three most recent calendar years available. In this regard, the Commission used data from the years 2013, 2014 and 2015 since, at the time of the assessment, data from 2016 were only available for some of the parameters.

(6) In order to establish the carbon leakage list for 2021-2030, the Commission assessed the risk of carbon leakage of sectors and subsectors at NACE-4 level of the statistical classification of economic activities in the Union in accordance with Regulation (EC) No 1893/2006 of the European Parliament and of the Council. NACE-4 is the level with optimal data availability defining sectors precisely. A sector is denoted at a 4-digit level of the NACE classification, and a subsector is denoted at Prodcom-6 or 8-digit level, that is, the classification of goods used for statistics on industrial production in the Union, following directly from the NACE classification.

(7) The carbon leakage assessment was carried out in two steps. For the quantitative first-level assessment at NACE-4 level, a sector is deemed to be at risk of carbon leakage if the 'carbon leakage indicator' exceeds the 0.2 threshold set out in Article 10b(1) of Directive 2003/87/EC. For a limited number of cases with clearly established eligibility criteria specified in paragraphs 2 and 3 of Article 10b of Directive 2003/87/EC, a 'second-level assessment' was carried out, either as a qualitative assessment with specified criteria or as a quantitative assessment at a disaggregated level.

(8) In accordance with Article 10b of Directive 2003/87/EC, the carbon leakage indicator was calculated by multiplying the sector's intensity of trade with third countries by the sector's emission intensity.

(9) In accordance with Article 10b of Directive 2003/87/EC, intensity of trade with third countries was calculated as the ratio between total value of exports to third countries plus the value of imports from third countries and the total market size for the European Economic Area (annual turnover plus total imports from third countries). The Commission assessed the trade intensity for each sector and subsector on the basis of data reported by Eurostat in the Comext database. The Commission considers this to be the most complete and reliable data on the total values of exports to third countries and imports from third countries as well as on the total annual turnover in the Union.

(10) Emission intensity was calculated as the sum of direct and indirect emissions for the sector concerned, divided by the gross value added and is measured in kg CO2 divided by euros. The Commission considers the data in the European Union Transaction Log to be the most accurate and transparent source of CO2 emissions data at installation level and have therefore been used to calculate the direct emissions for sectors. Installations have been attributed to sectors at NACE-4 level based on installation-level information provided by Member States in the national implementation measures submitted pursuant to Article 11 of Directive 2003/87/EC and Commission Decision 2011/278/EU. Regarding the estimation of gross value added at sectoral level, data from the Eurostat structural business statistics have been used as it is considered to be the most accurate source.